Traditional centralised exchanges work under the control of a central authority. The central system is responsible for controlling the flow and storage of your money. These traditional centralised exchanges lack privacy and security which puts the assets of users at risk of hack and theft. Here, it is the responsibility of central banking authority and government to make all the rules and regulations of the system.
Before the creation of Bitcoin, centralised exchanges were only ones in existence, which means that users and their funds were in control of a central authority. And after the introduction of cryptocurrencies, all these things got reversed. One of the main objectives behind bringing digital currencies was to decentralize the power and give control back to the owners. So, in place of a central banking authority, a decentralized exchange was established which does not have control over crypto users’ funds. To learn about more benefits of Decentralised Exchanges, read this blog.
Decentralized Exchange- Meaning
A decentralised cryptocurrency exchange is a cryptocurrency trading/ exchange platform. It is called decentralised as it does not depend on any third party’s service to hold its customer’s cryptocurrencies. Abbreviated as DEX, it operates in a decentralised way i.e. without any central authority. This decentralised exchange allows for a peer-to-peer cryptocurrency trading.
DEX- Working
In most of the cryptocurrency exchanges, private keys of the wallets are stored either at their own server or at a third party’s server. This means that if someone hacks the exchange or the third-party server, all the keys will go in hacker’s hands. This way, access to all the wallets and assets will be lost and cannot be recovered.
Whereas, in a decentralised exchange users trade directly with each other through an automated process. As crypto user, you can trade cryptocurrencies directly with others and do not have to transfer your assets to the exchange; this helps in reducing the risk of fund theft from the hacking of exchanges. The problem of hacking arises when digital currencies are stored at the crypto exchange. But when cryptos are stored in traders’ wallets and not with the exchange, there is no risk of hacking and theft.
Every trader having access to their own assets makes their wallets much safer. Even if a single user’s wallet gets hacked, it will not lead to a loss of anyone else’s assets and they won’t be affected. Decentralised exchanges also prevent price manipulation and maintain a great level of anonymity as compared to exchanges who ask for ‘Know Your Customer’ requirements.
Advantages of Decentralized Exchanges
The functioning of DEX makes it a safer environment for crypto wallets and assets. Following are some of the major benefits of Decentralized Exchanges:
Security
The greatest advantage of a decentralized exchange is that it enhances security. As explained before, DEX provides crypto users with advanced security as there is no third-party service involved for storing the keys and crypto assets of users. Traders themself have full control over their cryptos’ security.
Trustless
The is the most obvious advantage of using a decentralized exchange as compared to a centralized crypto exchange. Being trustless is the nature of a DEX. This means that it is not required to trust the security and honesty of the exchange platform as the crypto assets are in your control. At this point, your funds are held by you in your personal crypto wallet and not by any third party.
Privacy
Many centralised crypto exchanges require crypto users to sign up and provide personal information like identity proof, phone number and e-mail ID, etc. But when you talk about DEX, there is no requirement of providing any personal details. While there are some decentralised exchanges who ask a user to sign up, but they do not ask for any personal information. Hence, this maintains the privacy of customers.
Decentralization of Servers
As it is the nature of decentralised cryptocurrency exchanges, they do not have a centralised server. DEXs are stored across various servers situated across the world. This guarantees that the user’s data and funds are safe and the exchanges are much difficult to hack as compared to centralized crypto exchanges.
Useful in Countries Where Exchanges Are Banned
Many countries have been putting strict laws on digital currencies and crypto exchanges. These countries have also been issuing banking embargos on digital assets businesses. So here, peer-to-peer networks offered by decentralized exchanges are a great solution to government order against cryptocurrencies. The reason behind this is that these exchanges are not situated at a single location so, they cannot be banned.
Hence, to sum it all up, decentralized exchanges are in line with the core concept of cryptocurrencies i.e. being decentralized. DEX gives a large number of users the freedom of being anonymous. There is no hindrance in between the cryptocurrency transactions as well. At present, it might be difficult for some users to adapt to DEX and the benefits it offers, but the future of this exchange looks bright as users seek control over the security of their own digital assets.
